| Abstract: |
We investigate how information processing frictions contribute to household
suboptimal saving and investment behavior. We find that 60% of open accounts
in college 529 savings plans are invested suboptimally due to high expenses
and tax inefficiency. Such investments yield an expected loss of 9% over the
accounts’ projected lifetimes. Consistent with information processing
frictions contributing to inefficient investment, the extent of investment in
suboptimal home-state accounts decreases with household financial literacy and
increases with plan document disclosure complexity. Overall, our results
suggest that information processing frictions shape households’ suboptimal
investment in college savings plans and reduce their financial well-being. |